Rationality is a Property of Equilibrium

Some thoughts on rationality and economics, perhaps for a future paper, motivated by the financial panic:  

Rationality is a property of equilibrium.  By this I mean that
rationality is habitual and experience-based and it becomes effective
as it becomes embedded in the rules of thumb and collective wisdom of
market participants.  Rules of thumb approximate rational decision
rules as market participants become familiar with an economic
environment.  Individuals per se are not very rational; shift the
equilibrium enough so that the old rules of thumb no longer apply and
we are likely to see bubbles, manias, panics and crashes.  Significant innovation is thus almost always going to come accompanied with a wave of irrationality.  When we shift to a significant, new equilibrium rationality itself is
not strong enough to tie down behavior and unmoored by either reason or
experience individuals flail about liked naked apes – this is the realm of behavioral
economics.  Given time, however, new rules of thumb evolve and
rationality once again rules but only until the next big innovation arrives.


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